Oil Tumbles After Cypriot Lawmakers Reject Tax on Bank Deposits

The price of the benchmark U.S. crude oil, West Texas Intermediate, fell sharply after the Cypriot parliament defeated a measure imposing taxes on bank deposits, bolstering concern that Europe’s debt crisis will deepen. WTI’s discount to Brent crude traded in London narrowed to less than $15 a barrel.

Futures dropped 1.7 percent, trimming the spread with Brent oil, after Cypriot President Nicos Anastasiades failed to gain approval of the proposal to raise 5.8 billion euros ($7.5 billion) from bank depositors to unlock emergency loans. European officials had demanded passage of the plan in return for the funds to prevent a financial collapse. The euro fell to a three-month low versus the dollar.

“The problems in Cyprus have sent the dollar higher and put downward pressure on commodities,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The Cypriot vote today underscores just how precarious the euro-zone situation is. Developments in Europe are the major downside risk for oil this year.”

WTI for April delivery, which expires Wednesday, slid $1.58 to settle at $92.16 a barrel on the New York Mercantile Exchange. It was the biggest drop since Feb. 21. The more-active May contract fell $1.59, or 1.7 percent, to $92.52. The volume of all futures traded was 27 percent above the 100-day average at 3:28 p.m.

Brent oil for May settlement declined $2.06, or 1.9 percent, to end the session at $107.45 a barrel on the London-based ICE Futures Europe exchange, the lowest level since Dec. 10. Volume was 18 percent above the 100-day average for the time of day.

Narrowing Spread

The premium of the May Brent contract to WTI oil for the same month slipped to $14.93, the least since July 24.

“Brent remains under pressure because of what’s going on in Cyprus, and the spread with WTI continues to come in as a result,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Aid for Cyprus hinges on adoption of the deposit tax, Michael Meister, the deputy parliamentary chairman of German Chancellor Angela Merkel’s Christian Democratic Union, said after the vote.

“There will be no program if the conditions are not fulfilled,” he said in an e-mailed statement. “Now it must be reviewed whether and which measures must be undertaken against effects on the rest of the euro area.”

No ‘Plan B’

French Finance Minister Pierre Moscovici said earlier today that there’s no “Plan B” for the island country. Among the potential measures is cutting off funds to the nation’s banks through the European Central Bank’s Emergency Liquidity Assistance program.

WTI rebounded to $92.32 a barrel in electronic trading after the settlement as the ECB reaffirmed “its commitment to provide liquidity” to Cyprus “as needed within the existing rules.” The ECB statement was issued in Frankfurt following the Cypriot parliament’s vote.

“The situation in Cyprus has serious implications for the market,” said Kyle Cooper, director of research with IAF Advisors in Houston. “Even if the plans are watered down, there will be a major impact on market psychology. The fact that people in power were thinking of seizing people’s assets is worrying to investors.”

Euro Drops

The euro fell against the dollar, reducing the appeal of crude as an investment, amid speculation that the European debt crisis will worsen. The common currency dropped as much as 0.9 percent to $1.2844, the lowest level since November.

The Standard & Poor’s 500 Index fell 0.5 percent and the Dow Jones Industrial Average was down 0.2 percent at 3:29 p.m.

“There’s a strong correlation between currencies and oil,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “The euro is getting clobbered and this is absolutely bearish for oil.”

U.S. crude inventories probably rose for a ninth week, the longest run of gains since May, as output surged to the highest level in more than two decades, a Bloomberg survey showed before an Energy Information Administration report tomorrow. Supplies climbed by 2 million barrels in the seven days ended March 15 from 384 million in the prior week, according to the median of 11 analyst estimates.

“We’re sitting on 384 million barrels of oil in the U.S. today, which is a record for this time of year,” Schork said, “Supply is plentiful and demand just isn’t that strong. There are plenty of economic risks that could reduce demand.”

U.S. Output

Production rose to 7.16 million barrels a day the week ended March 8, the highest level since July 1992, a March 13 report from the EIA showed. A combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations. The EIA is the statistical arm of the U.S. Energy Department.

The price of the benchmark U.S. crude oil, West Texas Intermediate, fell sharply Tuesday after the Cypriot parliament defeated a measure imposing taxes on bank deposits, bolstering concern that Europe's debt crisis will deepen.